Authored by George Tonks
Avid readers of previous newsletters will recall that the bodies responsible for accounting standards are working on revisions to the rules for lease accounting, with the aim of issuing new proposals in Summer this year. The work still seems to be on track to meet this timetable, which could then mean the new rules taking effect for many people from 2012. We will produce a full review of the proposals once they are published but, in the meantime, a brief update is given below.
The principal aim of the accounting bodies in providing new accounting rules for leasing is to stop the current use of operating leases to provide off-balance sheet finance for lessees. Therefore the main plank for these proposals will be that any lease will give rise to a liability and an asset on the lessee’s balance sheet. There has been some discussion about excluding small value or shorter term leases, but the accounting bodies do not accept these arguments on principle. Consequently lessors have concerns that these new accounting rules will adversely affect the commercial attractiveness of equipment leasing for customers. Whilst this concern has been raised by Leaseurope and others, the accounting bodies seem to be intransigent at present.
Alongside lessee accounting, lessor accounting is under discussion, with the likely proposals still evolving. However, there are two areas which give concern for lessors. Firstly, the accounting bodies take the view that a lease gives the lessor two assets: one in respect of ownership of the equipment and the other for the rentals due from the lessee, together with a liability for the “performance obligation” to allow the lessee use of the equipment over the term of the lease. They are at present unsure whether the liability should be netted off the assets on the balance sheet, or whether the balance sheet should be presented on a “grossed up” basis. If the latter option is selected, then return on assets would be reduced and there could be an effect on regulatory capital requirements.
The second issue of concern on lessor accounting is an apparent shift in the borderline for revenue recognition, particularly for captive lessors. At present “manufacturer/ dealer” lessors are allowed to recognise a “selling profit” under a finance lease, but not under an operating lease. The discussion so far points towards the recognition of a selling profit only where the lease is an “in-substance sale”, which would exclude many current finance lease transactions.
For more information on the current position or to discuss potential impacts on your business, contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com.
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